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September 3, 2012
One of the main reasons to incorporate a Spanish property into a UK limited company is to avoid Spanish Inheritance Tax. Being a constant matter of concern for owners of Spanish Property and their relatives, essentially when they are non residents, if it is their second residence or when the property has substantial value. In this sense, such concern is justified because the tax rates applicable could rise up to 34 – 36.50 % depending on the market value of the property and their tax residency.
For this reason, we offer our tax and legal services in order to mitigate the Inheritance taxation in Spain. Because of its complexity, involving Inheritance Law and International and Spanish Taxation, it is something that you should leave to experts. At Lexland Abogados we have been offering Inheritance Tax Planning for Non Residents, particularly UK residents, for over a decade. And lately, many of our clients are requesting information with regards to incorporating their Properties located in Spain into a UK Limited Company.
First of all, let us explain that in Spain the Inheritance Taxpayers are the heirs or bequests. In all cases, the applicable legislation would be the Inheritance and Gift Tax Law (Ley 29/1987, de 18 de diciembre). However, depending on the tax residency, the tax rates and allowances would vary. In this sense, being a non residents for tax purposes the National Inheritance Tax Legislation would be applicable, which rates are progressive depending on the value of the good or right acquired from 7.65 % to 34 %. In case of being residents both the National and the Local Inheritance legislation of the Autonomous Community would be applicable, which rates are progressive as well but include many exemptions and deductions, and furthermore increased rates in certain regions.
In this respect, we are aware that the regulation for residents is more beneficial than for non residents, being an actual matter of discussion for the EU Commission which decided at the end of October of 2011 to sue Spain before the European Court of Justice (ECJ) since the Spanish inheritance and gift tax regulations in Spain discriminate non residents. Nonetheless, that would be a future matter of discussion.
With respect to the viability of incorporating a Spanish Property into a UK Limited Company, having as a result a structure of shareholders owning the UK Limited Company and the UK Limited Company holding the Property in Spain, let us inform you that it should avoid Inheritance Tax in Spain.
According to the article 7 of the Spanish Inheritance and Gift Tax Law non residents are ‘subject to this tax figure for the goods and rights received, of all nature, which are located, could be exercised or should be fulfilled in Spanish territory’. In this respect, the shares of the UK Limited would not be subject to Spanish Inheritance Tax because the shares are not located, exercised or fulfilled in Spanish territory. However, the article 18.2.2º of the Regulations of the Inheritance Tax Act (Real Decreto 1629/1991, de 8 de noviembre) says that ‘for the purpose of considering when the goods or rights are located in Spanish territory the immovable and movable assets, and in particular the movable assets affected to Dwelling, Land and Industry located in Spain’. The interpretation of this legal norm is that the shares of a UK Limited Company, as movable assets, would be subject to Inheritance Tax in Spain.
In this scenario, to incorporate a Spanish Property into a UK Limited Company for the above mentioned purpose would be tax efficient not because the shares of the UK Limited Company would not be subject to Spanish Inheritance Tax, but for its almost total opacity for the Spanish Tax Authorities.
On the other hand, we must consider the disadvantages of incorporating a Spanish Property into a UK Limited Company. In this respect the transfer of Property could be carried out by either a Spanish or English Notary Public, but in order to accomplish the transfer it should be registered at the Spanish Property Registry. Considering that it should be registered in the Public Registry where the Property is located, the necessary contribution in kind of the Property to the UK Limited should fulfill all the requirements settled by the Qualified Property Registry. In this respect, the Spanish Supreme Court has just confirmed the validity of the inscription of a German Deed, where the owner of an apartment located in Tenerife sold his share to a third party in 1984. This decision is not binding for any other Courts in Spain because there must be at least two Supreme Court Decisions confirming this ruling. We are not saying that it is not possible to incorporate the property to a UK Limited, but depending on the Property Registry it would or would not be registered.
Spanish Notaries and many Property Registries are very suspicious of Foreign Notary Deeds, on one hand because the Spanish Notaries would be facing competence because of the application of the Directive 2006/123/EC on services in the internal market, and on the other because the way it is understood the Transfer of Property in the Spanish Legislation it is not equivalent to other EU Countries and the Property Registry is independent on valuing the registry. And furthermore, the Spanish Notaries and the Property Registry are bind by the Spanish “Dirección General de los Registros y del Notariado”, some short of lobby which interests are confronted with the Directive EC on services and the recognition of Foreign Deeds.
Nonetheless, in our experience many Property Registries are registering Foreign Deeds, although they are taking into account every little detail of the Spanish Legal requirements in the Foreign Deeds.
Tax consequences for the incorporation in Spain
At the same time, we have to be aware of the tax consequences that would arise in the transaction of the incorporation of a Spanish Property into a UK Limited Company.
The easiest way to perform such transaction would be through a contribution in kind of the Spanish Property. This transaction would accrue Capital Gain Tax for the transferor and therefore a 3% withholding tax on the market value of the Property would be necessary.
In case the withholding tax is not performed, and without taking into considerationthe applicable penalties, there would be at least two consequences:
1. The Property would be affected. The affection of the Property means that the Spanish Tax Authorities are entitled to seize and sell the Property in order to recover the tax debt. Without having a fiscal residence or fiscal domicile in Spain, the Tax Authorities would not be able to duly communicate the amount due and they are allowed to start the seizure procedure and eventually sell the property at auction.
2. The Public Registry should register the Notary Deed, but is obliged to either communicate this circumstance to the Spanish Tax Authorities or to establish the affection in the Deed.
With regards to the Local Taxes, local tax on the sale would also be applicable (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana) in the transaction. And furthermore the Local rates tax (Impuesto sobre Bienes Inmuebles) and the Garbage collection Tax (Tasa de Basuras) can only usually be paid through a Spanish Bank account or at the Town Hall. Official communications would not be sent to the UK. In this respect it would be necessary for you to appoint a fiscal representative in Spain and establish a Fiscal residence for notification purposes.
Moreover, because the Spanish Notary Public and the Property Registry would demand the 3 % withholding tax form, it would be necessary to appoint a fiscal representative in Spain for the UK Limited Company.
At the same time, the UK Limited Company would be subject to the Special Tax on Real Estate for Companies owning Property in Spain. Nevertheless, all Companies which are tax residents in a Country with a Double Taxation Treaty with an Exchange of Information Clause signed with Spain are allowed to apply for an exemption, by providing a Certificate of Residence for both the Company and the Shareholders.
Transferring a Spanish property into a UK Limited Company might be considered Tax evasion, although it works for eluding Spanish Inheritance Tax because the opacity for the Spanish Tax Authorities. However, we are aware that there are better ways to ensure an Inheritance Tax Planning in Spain, at least with respect to legal and tax costs of the necessary transaction and cost of maintenance of the structure.